Monday, April 28, 2014

Nepotism. The hidden hand of inequality.

Conventional wisdom tells us that capitalism is by far the best economic system for allocation of resources to consumers. The storied history of capitalism in America speaks to this as America is one of the largest economies in the world. Other countries have modeled their economies on the American economy with varying degrees of success. It is even a fair statement to say that every country that has tried capitalism has fared much better than communism. After the failure of the communist economies of the last century, few could argue with that.

But there is another element to capitalism that conservatives remain fiercely unapologetic for: patrimonial capitalism, and its cousin, nepotism. To put it simply, humans are social creatures and therefore have a strong tendency to put social concerns before rational actions in the market. This tendency gives rise to a phenomenon called "crony capitalism". The existence of crony capitalism proves that the rational actor in the libertarian ideal of the free market is largely a myth. If you don't believe me, take a look at the products lined up for sale at the checkstand of your local chain store supermarket.

For further proof, I direct your attention to an observation made by noted economist, Dean Baker. Baker observed that the stratospheric pay packages for CEOs are a deal between friends. Worse, despite the concerns that Warren Buffet may have about those pay packages, he will not divest those companies with the same ridiculous pay packages simply because "he doesn't want to make waves". Even a billionaire is worried about social concerns before money. Is that rational? Hardly. But it does show that social concerns are powerful enough to prevail over money.

Notice that few if any conservatives are willing to discuss nepotism. Comes now, a book by Thomas Picketty, Capital in the 21st Century, a book that squarely nails nepotism and patrimonial capitalism in a way that cannot be ignored by anyone. Paul Krugman argues that the book changes the way we think about capitalism, forever. Krugman also notes that conservatives are having a hard time finding coherent rebuttals in their brains and have resorted to calling Picketty a "socialist" and a "communist". The conservatives are in a panic over Picketty's observation that over the long run, capital will outperform labor, every time.

Someone has written a brief overview of the arguments in the book and the data held out to support it. The summary? The super wealthy cannot support their positions through talent alone. So they hand down their wealth and the knowledge needed to maintain it through network of private, nearly secret schools of training that most other people know nothing about. They too, have a social network that allows them to keep what they have and hand it down. Why all the secrecy?

Genes are selfish. Genes are social. Genes want to preserve themselves and no others. That's just the way it is, isn't it? But not every set of genes has the talent needed to keep the economy running at full employment, now do they? If the history of the 2008 meltdown has taught us anything, it is that the meltdown wasn't due to talent at the top, it was due to a dire lack of it.

The Reagan Revolution led us down this path. The Reagan Revolution extolled the virtues of the market while completely ignoring the tension between capital and labor, those who own the capital and those who work for the owners. The Reagan Revolution ignores the disparity between capital and labor and tries to tell us that in a free market talent will always win. Maybe. But if you don't go to that secret, prestigious little school on the other side of town, you may have talent, but you will be working for someone else, someone who might not have talent. He may just have a very wealthy father with connections.

The Greeks observed that your money is only as valuable as the taxes you pay. Taxes can make money scarcer, harder to come by. When money is harder to come by while you're running your business, you get really interested in talent rather than social connections. Even if your best bud is a great guy and can manage things in a business, if money is tighter due to taxes, you will find someone who can do the job better, won't you? I would. It doesn't matter to me if you're family, black, white, gay, whatever. If you can do the job better than anyone else, I want you on my team. Apparently, that's not the case at the top. Higher taxes on capital is part of the solution, but we need more than that.

The nepotism at the top goes largely unnoticed. It is a secret form of racism that few dare to discuss. But it is there. It is a symptom of something called "Social Class Essentialism". Whoever they are, they think they are better than everyone else. Due to their status at the top, they are untouchable by law enforcement, they often don't go to jail for their crimes, and they certainly don't take responsibility for their mistakes. Just ask Lloyd Blankenfein, CEO of Goldman Sachs.

Do we really want these people running our country? Is there anything we can do about it? I don't know yet. I'm looking at solutions that could help and there are many, like The Declaration of Independence makes another important observation, "that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed." That makes the fight harder, but if the Founding Fathers could bring about liberty and justice, so can we.
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